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R&D Spending Hits the Fastest Pace in 12 Years: Top 5 Winners

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The U.S. economy suffered from a lack of big ideas for a while. But that’s not the case now. There has been a surge in research and development (R&D) spending at corporate houses, particularly this year. It is a welcome change and indicates that companies are finally putting their money into innovative ideas to boost productivity, which has been lagging badly.

Research and development increases market participation, helps a company stay ahead of market trends and keep it relevant. Thus, investing in companies that have stepped up investments in R&D so far this year seems prudent.

Business Investments in Intellectual Property Rise

As per government and corporate data, several companies are pouring billions of dollars into R&D, thereby driving business investments in intellectual property at the fastest pace in 12 years. Per FactSet nearly 215 S&P 500 companies said that their R&D investments on a quarterly basis increased more than $19 billion to $140 billion in the first half of this year compared to the same period a year earlier. That’s an annualized growth rate of around 33%.

Bureau of Economic Analysis also added that private-sector investments in intellectual property, which includes R&D, have grown at an annualized rate of 11.1% to $893 billion so far this year. This, in turn, contributed about 0.5% to the 3.1% annualized economic growth rate, their biggest contribution since 1999.

What Boosted Spending in R&D?

Most of the companies did have plenty of cash on hand, so availability of capital hasn’t affected spending in R&D. Moreover, it’s not the capital but the market opportunities that determine whether a company will in invest in R&D or not.

So, is it the recent corporate tax cuts that have got to do something with the spike in R&D? Sure, there is a possibility. Companies are currently capitalizing on the recent tax cut to increase their R&D expenditures, since the law requires amortization of R&D expenditures beginning in 2022.

Big Spenders in Intellectual Property

Big U.S. tech firms and pharmaceutical companies are investing heavily in R&D. Of the S&P 500 companies that report R&D quarterly, the top spenders in their last two quarters are Amazon ($14.01 B), Alphabet ($10.15 B), Microsoft ($7.65 B), Apple ($7.08 B), Intel ($6.75 B), Merck ($5.35 B), Johnson & Johnson ($4.79 B), Facebook ($4.76 B), Bristol-Myers-Squibb ($3.65 B), Pfizer ($3.53), Celgene ($3.45 B), Cisco Systems  ($3.22 B), Oracle ($3.04 B), Qualcomm ($2.81 B) and International Business Machines ($2.77 B), per FactSet.

Each of these companies is trying to maximize their market share for fast growing technologies including cloud computing, artificial intelligence and new generation drugs. Amazon, in particular, doesn’t use the term ‘research and development’ but states ‘technology and content’ that includes outlays on equipment, property, software and artistic content.

Investments in R&D by automakers, aerospace, other industrial companies, energy, materials and chemicals are surely missing the list. However, we all know that a lot of investments are required for self-driving vehicles and renewable energy to name a few, which have the potential to transform our world in the next few decades. Fortunately, General Motors, Ford, Lockheed Martin, General Electric and Exxon Mobil do have a very large R&D budget, an encouraging sign indeed.

Why R&D Matters?

The research that we do at present will certainly lead to amazing goods and services of tomorrow. A high level of R&D invariably leads to higher productivity growth, which will eventually help the broader economy grow at 3% or more.

R&D, by the way, boosts the standard of living and labor productivity. This again bodes well for the economy. Remember, that the United States has invested more than $550 billion a year in R&D, nearly 25% of total global outlays. But China and several other Asian economies are catching up, with growth rates that are twice as high.

5 Top Players Worth Buying

Given the importance of R&D and the pace at which it has picked up, investing in stocks that are spending big on tomorrow’s ideas is the best thing to do right now. Their innovative approach and the zeal to stay ahead of the pack will surely boost profit margins in the long run. We have, thus, selected five such stocks that also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Technology

Amazon.com, Inc. AMZN engages in the retail sale of consumer products and subscriptions. Further, the company provides compute, storage, database, and other AWS services. Currently, the company has a Zacks Rank #1. In the last 60 days, 18 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings surged 38.8% in the same period. The company’s projected growth rates for the current quarter and year are 517.3% and 279.6%, respectively.

Microsoft Corporation MSFT develops, licenses, and supports software, services, devices, and solutions. Recently, the company has a Zacks Rank #2. In the last 60 days, 15 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 7.3% in the same period. The company’s projected growth rates for the current quarter and year are 14.3% and 9.5%, respectively.

Apple Inc. (AAPL - Free Report) designs, manufactures, and markets mobile communication and media devices. Currently, the company has a Zacks Rank #2. In the last 60 days, 10 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 2.5% in the same period. The company’s projected growth rates for the current quarter and year are 32.9% and 26.8%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pharmaceutical

Bristol-Myers Squibb Company BMY discovers, develops, licenses, manufactures, markets, and distributes biopharmaceutical products. Recently, the company has a Zacks Rank #1. In the last 60 days, 8 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings advanced nearly 5% in the same period. The company’s projected growth rates for the current quarter and year are 18.7% and 19.3%, respectively.

Celgene Corporation CELG, a biopharmaceutical company, engages in the discovery, development, and commercialization of therapies for the treatment of cancer and inflammatory diseases. Currently, the company has a Zacks Rank #2. In the last 60 days, 11 earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings increased 2.9% in the same period. The company’s projected growth rates for the current quarter and year are 16.2% and 17.7%, respectively.

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